Goodyear Tire & Rubber Company (GT): At Bargain Levels Now With Multiple Upside Catalysts

Goodyear Tire & Rubber Co. (NASDAQ:GT) is an iconic American tire company, and it is also well known for its blimps. The company offers tires under the Goodyear brand, as well as under the Dunlop and Kelly brand names. The shares recently plunged after the company released earnings, and it seems the market has overreacted to these financial results. I believe this short-term thinking by some investors has created a buying opportunity. Let’s take a closer look:

In October 2014, I wrote about Goodyear and at that time it had also just experienced a pullback and my article suggested it had 50% upside. When my article was published, the stock was trading around $20, and it ended up rising to about $37 per share by 2017, which made it nearly a double. Back then, I felt there were a few factors that came together to make buying Goodyear shares compelling and once again I see a number of factors, including a recent pullback, which make this a compelling time to buy. In 2014, I saw multiple upside catalysts, and now I also see some upside catalysts that compel me to buy shares.

The Chart:

As the chart below shows, Goodyear shares recently plunged. It was trading at around $14.50 per share just about 4 weeks ago, but the stock plunged to the $11 range, after the company announced disappointing financial results (lower tire volumes). The chart also shows that this stock bottomed out in October 2023, and it recently hit that same level, which has now created a very bullish double bottom on the chart. This double bottom could be signaling that there is a lot of support around the $11.50 level, which therefore means there might be limited downside risks at this level. It could also signal that Goodyear shares could be poised to rebound higher, just as they did the last time this level was hit.

Earnings Estimates And The Balance Sheet:

Analysts expect Goodyear to earn $1.25 per share in 2024, $1.93 per share in 2025, and $2.27 per share in 2026. 2024 appears to be a transition year for Goodyear, so earnings are reduced due to additional expenses that come with streamlining and cost cuts. However, this stock appears undervalued, trading at just about 10 times (depressed) earnings for 2024. When you get past 2024, the stock looks even more undervalued, trading at just about 6 times earnings estimates for 2025.

In terms of the balance sheet, the latest data compiled by Seeking Alpha shows Goodyear has about $902 million in cash and $8.65 billion in debt (this includes about $1.083 billion in capital leases.) The net debt is about $7.75 billion. The debt load is something I would like to see paid down, but it appears manageable for a company with over $20 billion in revenues. It looks like the company will strengthen the balance sheet by paying off debt, especially with potential asset sales.

Recent Financial Results:

For the fourth quarter of 2023, tire volumes dropped 3.8% from prior year levels. The market did not seem to like that aspect, but overall the earnings seemed solid to me. Adjusted earnings per share came in at 47 cents for the quarter. In my opinion, this level of earnings seems to be quite strong for a stock that is trading for just over $11 per share.

A Well-Known And Very Successful Shareholder Activist Is Involved And Sees Major Upside:

Elliott Management is a very well-known shareholder activist and is pushing Goodyear to take action on a number of fronts. Elliott Management has proposed 5 new Board Members, tighter controls, margin expansion, as well as the sale of the roughly 1,000 Goodyear retail stores and more. Elliott Management believes Goodyear shares could be worth $32 if its proposals are implemented. Elliott Management is run by billionaire Paul Singer, and the company has been successful in creating shareholder value through activism. Elliott Management got involved with Goodyear as activists several months ago, and it is now one of the largest shareholders. Elliott Management has succeeded in getting new board members, and it continues to push for change. The recent pullback in the stock was surely not what big shareholders were hoping for, but it appears to just be a bump in the road in terms of longer-term potential, and that means it’s probably a buying opportunity. Let’s look a bit closer at some of the strategic objectives that could potentially send Goodyear shares back over the $30 range:

“Accelerating Goodyear” is the name of the strategic plan and presentation that Elliott Management has come up with. The presentation states that Elliott Management has done extensive due diligence on Goodyear, and it states that the company has underperformed for the past decade. The presentation highlights the fact that Goodyear has a 125-year-long history and that it is a market leader with the highest brand name recognition in the United States. The Goodyear brand is #1 in terms of replacement tires and OEM tires in the USA. As you can see below, Elliott Management believes that monetizing the retail stores could add $4 per share in value and margin expansion could add $16 per share in value, with the totals of these leading to a $32 share price:

Fortunately, Goodyear has been receptive in making changes, and it has come up with a set of goals it has under its “Goodyear Forward” plan. This plan includes reviewing strategic alternatives for the Dunlop tire brand, and it expects to realize expense reductions of $1 billion annually by the fourth quarter of 2025. For a company with about 284 million shares outstanding, $1 billion brought to the bottom line due to expense reductions, could have a very significant positive impact on earnings per share.

Goodyear Appears Deeply Undervalued When Compared To One Of Europe’s Biggest Tire Companies:

In terms of valuation, it makes sense to look at one of Europe’s leading tire makers, and that would be Michelin (OTCPK:MGDDY). Analysts expect this company to earn $1.68 per share in 2024, and $1.72 per share in 2025. Since this stock currently trades for over $18 per share, those earnings estimates imply a price to earnings ratio of right around 11. Michelin generates about $30 billion in annual revenues and the enterprise value is also around that level, which suggests a 1-to-1 ratio. The market capitalization is about $26 billion.

By comparison, Goodyear trades for about 5 times earnings. It has annual revenues of roughly $20 billion, an enterprise value of $11.29 billion and a market capitalization of about $3.4 billion. This shows that Goodyear is trading for nearly half the valuation of Michelin in terms of price to earnings ratio (for 2025 earnings estimates) and also about half the valuation in terms of revenues to enterprise value ratio. This would suggest that Goodyear could be worth double the current share price, if it were valued at the same level its European peer enjoys. Michelin pays a dividend of just over 3% and as you can see by looking at the enterprise value and the market capitalization, it has a much stronger balance sheet. With the moves Goodyear is making to cut costs and to monetize assets, (such as possibly selling the over 1,000 retail stores and the Dunlop tire brand) I am hopeful that they will reinstate the dividend at some point and use extra cash flow to pay down debt. This could help Goodyear achieve a valuation that is similar to Michelin.

Multiple Upside Catalysts:

After a recent selloff, this stock appears oversold, and that itself could be an upside catalyst. Other upside catalysts include the potential for Goodyear shares to see multiple expansion to levels that are more in line with Michelin. Company updates on potential asset sales or other monetization efforts could also serve as upcoming upside catalysts, as could continued pressure from Elliott Management. If the company succeeds in the goal to cut costs by $1 billion by 2025, this could serve as another major upside catalyst, as it would likely expand profit margins and earnings.

Here’s What I Like About Goodyear:

There is a lot to like. For one thing, the recent drop in the stock has given us a chance to buy around the “ground floor” level of $11 per share that Elliott Management put in their presentation in 2023. I don’t see the recent Q4 financial results as anything more than a bump in the road towards a potential share price of $32. If $32 per share is reached, this would be a near triple, based on the current share price in the $11 range.

The recent plunge in the stock seems to have sparked a significant insider buy. In February 2024, Max Mitchell (a director) bought 42,000 shares, in a transaction valued around $500,000. Max Mitchell is one of the new board members, and he started serving on the board in July 2023. Based on this large and recent purchase that occurred just after Goodyear shares dropped, it looks like he sees this as a buying opportunity, and this would also suggest that he sees the potential for improving financial results and a higher share price in the future.

Another positive is that Goodyear is succeeding in supplying the EV market with tires, as it is an OEM supplier to companies like Tesla (TSLA). EV tires also wear out about 20% faster than internal combustion vehicles due to the instant torque and acceleration, and also because of the weight of the battery. Because of this, Goodyear can benefit from the long-term trend for EV’s. California and several other states plan to ban the sale of new vehicles with internal combustion engines by 2035. This means that over time, Goodyear should be selling replacement tires much more frequently as the mix of tire sales increasingly skews towards EV’s.

Goodyear was paying a quarterly dividend of 16 cents per share, (or 64 cents per share annually) but this stopped in 2020, when the pandemic started. If the company sees more concrete progress on improving margins and paying down debt, I think it is possible for a dividend to be resumed. This is another factor that could help to boost the share price in the long run.

Here’s What I Don’t Like (Potential Downside Risks):

I would like to see Goodyear pay down debt, which would reduce interest expenses and strengthen the balance sheet. Perhaps this will happen if the company monetizes the retail stores, and/or if margins are expanded. My other concern would be a recession, which could impact OEM tire sales and replacement tire sales as well. The economy has held up extremely well in the face of a major increase in interest rates, but there is always a chance that the Federal Reserve will make, or has already made a policy mistake in keeping interest rates too high for too long. The track record of “soft landings” has not been great for the Federal Reserve, so we have to hope they get this one right. It is possible that AI will spark optimism as well as increased productivity, which would support a soft or no landing scenario.

In Summary:

The share price decline after Q4 earnings were reported appears to be an overreaction. This looks like a buying opportunity, and it is great to see a relatively new director using this pullback as such. Goodyear appears committed to its “Goodyear Forward” plan, and Elliott Management is fighting for fellow shareholders with its “Accelerating Goodyear” plan. This company is a leader in tires with very strong brand recognition, and it seems poised to make changes that will ultimately lead to a higher share price. I think the stock is a strong buy in the $11 range, as it appears to be trading at a bargain valuation, and I believe it will rebound soon. Hopefully, a dividend comes back in the future. I have noticed that the option premiums are generous with this stock, so for those that are seeking to generate some income on this position, it could make sense to write covered calls.

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